'Ak' Sound Heard from Debt-to-Equity Ants... Forced Sell-off Scale Doubled in 3 Years

KOSPI and KOSDAQ Down 12% and 16% Respectively This Year
Average Daily Forced Liquidation Volume Increased Since March

Credit Loan Transactions Rise Despite Index Slump
Brokerages Likely to Raise Credit Loan Interest, Increasing Burden

[Asia Economy Reporter Minji Lee] Amid the continued sluggish trend in the domestic stock market, the scale of forced liquidation has more than doubled over the past three years.

According to the Korea Financial Investment Association on the 29th, the actual scale of forced liquidation compared to margin trading unpaid balances averaged 16.7 billion KRW per day from January this year to the 26th of this month. This is more than twice the amount during the same period in 2019 (7.9 billion KRW), before the COVID-19 pandemic. It is also higher than the same period in 2020, the early stage of the COVID-19 crisis (13.6 billion KRW).

Margin trading is a very short-term credit transaction where individual investors borrow money from securities firms to buy stocks exceeding their own investment principal and repay the payment three days later. Forced liquidation occurs when investors fail to pay the settlement amount for stocks purchased on credit (margin trading), causing securities firms to forcibly sell the stocks, resulting in greater losses than regular transactions.

Looking at the monthly trend, the average daily scale of forced liquidation has continued to increase, recording 14.8 billion KRW in March, 15.6 billion KRW last month, and 17.1 billion KRW this month. This is due to individual investors failing to repay borrowed money as the domestic stock market continues to weaken.

As of the closing price on the 27th, the KOSPI stood at 2,638.05, down 11.7% since the beginning of the year, and the KOSDAQ index also fell 15.8% to 873.97. The increase in forced liquidation was also driven by major stocks in the KOSPI and KOSDAQ markets hitting new lows.

Margin trading can lead to so-called "empty accounts" if investors cannot repay the borrowed money even after selling all their stocks. Interest on overdue amounts must be paid on any remaining unpaid margin after forced liquidation. An increase in forced liquidation results in a flood of sell orders in the stock market, increasing downward pressure on the market itself. Investors fearing forced liquidation may engage in so-called "panic selling" during sharp price drops, further amplifying the decline.

Meanwhile, despite the continued decline in indices, the balance of credit loans for stock investment is increasing. As of the 26th, the credit loan balance was recorded at 21.6651 trillion KRW. The credit loan balance, which was around 10 trillion KRW until mid-2020, has surged and has remained above 20 trillion KRW since February 3rd of last year.

A concerning point is that securities firms are raising interest rates on margin trading loans in line with the base rate hikes. According to various securities firms, Shinhan Financial Investment, DB Financial Investment, and Meritz Securities will partially increase the interest rates on margin trading loans for new purchases starting June 2nd.

Shinhan Financial Investment will raise the interest rate for loan periods within 7 days from 4.50% to 4.75% per annum, an increase of 0.25 percentage points. Interest rates for 8?15 days (7.00% → 7.25%) and 16?30 days (7.40% → 7.65%) will also be raised by 0.25 percentage points each. This comes about three months after they raised interest rates by 0.4 to 1.6 percentage points in March. DB Financial Investment will increase interest rates by 0.20 percentage points across all periods, and Meritz Securities will raise margin trading loan interest rates by 0.10 percentage points. Yuanta Securities, Kyobo Securities, Daol Investment & Securities, and Daishin Securities have already raised their margin trading loan interest rates.